Effects of Buyback of Shares and Financial Ratios Improvement - Case Study of HUL Ltd
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Effects of Buyback of Shares and Financial Ratios Improvement - Case Study of HUL Ltd
- 2. MEANING OBJECTIVES OF BUYBACK PROVISIONS UNDER THE COMPANIES ACT, 1956 SEBI REGULATIONS, 1998 EFFECTS OF BUYBACK OF SHARES COMPANY SHAREHOLDERS IMPROVEMENT IN THE FINANCIAL RATIOS CASE STUDY – HUL LTD
- 5. • BALANCE SHEET OF A COMPANY BEFORE BUYBACK: Liabilities Amt. Assets Amt. Equity 1,00,000 Fixed Assets 6,00,000 Reserves 1,00,000 Current Assets 3,00,000 Long term debt 2,00,000 Cash 1,00,000 Bank Loan 2,00,000 Current 4,00,000 Liabilities TOTAL 10,00,000 TOTAL 10,00,000 Net Profit after tax (NPAT)= Rs. 10,00,000 If the company buys back 50,000 shares through cash, cash as well as the outstanding equity will decrease by Rs. 50,000.
- 6. Before Buyback After Buyback • ROE= Net Profit After tax • ROE= 10,00,000 = 20 Shareholder’s equity 50,000 = 10,00,000 = 10 1,00,000 • ROA= 10,00,000 = 1.05 9,50,000 • ROA= Net Profit After tax Total Assets • EPS = 10,00,000 = 20 = 10,00,000 = 1 10,00,000 50,000 • EPS= NPAT- Preference dividend No. of equity shares = 10,00,000 = 10 1,00,000
- 10. • The buy-back is authorized by the articles. a • Special resolution b • The buy back is less than 25% of total paid up equity capital and free c reserves. • Maintaining debt equity ratio: 2:1 d • All the shares or other specified securities for buy-back are fully paid- e up. • For listed shares as per guidelines issued by SEBI. f
- 11. Full & complete disclosure of all material facts Necessity for buy-back Class of security of buy-back Amount to be invested Time limit for completion of buy-back
- 12. Every Buy Back should be completed within 12 Months from the date of passing of the special resolution
- 13. From the existing shareholders on proportionate basis through the Tender Offer. From Open Market Stock exchange Book Building Process From Odd Lot Holders From securities issued to employees under ESOP
- 16. On completion of buy-back of shares / securities, the company shall not make further issue of the same kind of shares / securities within a period of 24 months except: d. Conversion of c. Stock option a. Bonus shares; b. Conversion of preference shares schemes or or warrants, or or debentures into sweat equity, or equity shares
- 18. Within 30 days of completion of Buyback Buyback of shares with ROC and SEBI (for listed co’s.)
- 19. a. Imprisonment upto 2 years; or b. Fine upto Rs. 50,000; or c. Both
- 20. When a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account referred to in clause (d) of the provision to sub-section (1) of section 80 and details of such transfer shall be disclosed in the balance sheet.
- 21. No company shall buy its own shares or specified securities • a) Through any subsidiary company including its own subsidiary company. • b) Through any investment companies or group of investment companies. No company shall directly or indirectly purchase its own shares or other specified securities in case such company has not complied with the provisions of sections 159, 207 and 211.
- 22. Special resolution Buyback should not exceed 25% of the total paid-up capital and free reserves. Declaration of Solvency The shares bought back should be extinguished and physically destroyed. No further issue of similar securities within 2 years, except bonus, conversion of warrants, etc.
- 23. Public announcement in, • One National English Daily • One Hindi National Daily • One Regional Language Daily Public announcement should specify Record Date Buyback is not allowed through negotiated deals or spot transactions or private arrangements. There is a freedom to fix the price of shares or other specified securities for buyback.
- 24. Promoters can sell their shares through tender offer & also through purchase offer of odd lots. Merchant bankers will have to be appointed A copy of the Board resolution authorising the buy back shall be filed with the SEBI and stock exchanges. Consideration will be paid in cash
- 25. Special resolution has to be filed with SEBI & stock exchanges within 7 days from date of passing the resolution. Once the offer is filed with SEBI or Public announcement is made, Buyback cannot be withdrawn. No public announcement is permitted during the scheme of amalgamation, compromise or arrangement. Appointment of Compliance officer & investor service center.
- 26. Locked-in or non-transferable shares are not allowed. Destroying the share certificates in presence of merchant banker & auditors within 15days. Buyback through the public offer or tender offer shall open an Escrow Account. Advertisement within 2 days of Completion Buyback.
- 27. a) Effects on the Company: SHAREHOLDING PATTERN CHANGES Company: A Ltd • Total no of shares 150 • Face Value 10 • Equity Capital 1500 • Buyback of equity shares 25 • Max offer price 15 • This can be broadly divided into two parts: Particulars Pre buy back Post buy back Promoters 50 50 Non promoters 100 75 SHAREHOLDING PATTERN IN % TERM Particulars Pre buy back Post buy back Promoters 33.33 40 Non promoters 66.67 60
- 28. Particulars Pre buy back Post buy back Cash 1000 625 Assets 10000 9625 Earnings 1500 1500 Outstanding shares 150 125 Equity shares 1500 1250 Reserves 200 75 Shareholders equity 1700 1325 MP 10 15 FINANCIAL RATIO ROA 0.15 0.16 ROE 0.88 1.13 EPS 10 12 P/E ratio 1 1.25
- 29. Tax Benefits Reduction Higher in Proportion investors interest of shares Higher Share Price
- 31. VALUATION OF BUYBACK OF SHARES Average Closing Price Inviting Shareholders to sell the share
- 32. Debt-equity ratio Track record Look at ROCE/RONW Take note of Irrationality Take a long-term perspective Dispose off volatile shares Selling off for profit
- 33. BUYING DECISIONS EPS Book Value Promoter Stake
- 35. Buy back of shares
- 36. ABOUT THE COMPANY 1. Beginning Hindustan Vanaspati Era of FMCG Manufacturing Company 2. Corporate History Sunlight Soap -1888 -1931 Listed onBrothers India Limited – Lever Kolkata, Madras & Bombay Lifebuoy – 1895 3. Listing 1956Lux -1933 10% equity - Indian Shareholders Vim…. United Traders Limited 4. Parentage -1935 Part of €40 billion Unilever Group Hindustan Lever Limited 5. Turnover -1956 Rs.17,523 Cr Audited results for April 6. Employment 1, Hindustan Unilever Limited -2007 2009 to March 3, 2010 >15000 direct employees
- 38. • Offered price : Rs 280/share • Maximum buyback of Shares: 2.25 crore • Maximum Amount : 630 crore (25% of equity share capital) • Equity and reserves : 218+2450cr • Cash and bank balance : Rs 1,976.79cr • Buyback from BSE & NSE through open market purchase
- 39. • Effective utilization of surplus cash • Smaller equity base EPS MPS MPS
- 41. Balance Sheet of HUL Ltd. As on 31-3-2010 (Rupees in crs) Particulars 31-3-2010 31-3-2011(E) (A) Sources of Funds 1.Shareholder`s Fund Capital 218.17 174.536 Reserves & Surplus 2,365.35 1,864.394 2,583.52 2,038.93 2.Loan Funds (a)Secured Loan (b)Unsecured Loan TOTAL OF (A) 2,583.52 2,038.93 (B) Applications of Funds Net block 2,162.11 2,247.52 capital work-in progress 273.96 273.96 Investment 1,264.08 1,264.08 Deferred Tax 248.82 248.82 Current Assets, Loans and Advances Inventories 2,179.93 2,179.93 Sundry debtors 678.44 678.44 Cash and bank balances 1,892.21 1,262.21 Other current assets 16.62 16.62 Loans and advances 600.56 600.56 5,367.76 4,737.76 Current Liabilities and Provision -6,733.21 -6,733.21 Net Current Assets -1,365.45 -1,995.45 TOTAL OF (B) 2,583.52 2,038.93
- 42. DATA 2010 2011 (E) (Rs. in Crs) (Rs. in Crs) PAT 2,202.03 2,202.03 Market price of share 239 280 No. of shares 218.17 174.54 Total assets/ Net Worth 2,583.52 2038.93 Assuming PAT to remain same in the year 2010-11 Key Financial Ratio (31st March) Particulars 2010 2011(E) Return on assets 0.85 1.08 Return on equity 0.85 1.08 Earning per share 10.09 12.62 Price earning ratio 23.68 22.18
- 43. • Current Price: Rs.314/share - Implications Buyback taken place Date BSE NSE 31 Aug 2010 42921 57079 23 Aug 2010 50060 49940 Total 92981 107019 2,00,000
Notas del editor
- 59. Annual return to be made by company having a share capital.(1) Every company having a share capital shall, within 1[ sixty] days from the day on which each of the annual general meetings referred to in section 166 is held, prepare and file with the Registrar a return containing the particulars specified in Part I of Schedule V, as they stood on that day, regarding-(a) its registered office,(b) the register of its members,(c) the register of its debenture holders,(d) its shares and debentures,(e) its indebtedness,1. Subs. by Act 31 of 1965, s. 62 and Sch., for" forty- two" (w. e. f. 15- 10- 1965 ).(f) its members and debenture holders, past and present, and(g) its directors, managing directors, managing agents, secretaries and treasurers, 1[ managers and secretaries], past and present: 2[ Provided that if 3[ any of the five] immediately preceding returns has given as at the date of the annual general meeting with reference to which it was submitted, the full particulars required as to past and present members and the shares held and transferred by them, the return in question may contain only such of the particulars as relate to persons ceasing to be or becoming members since that date and to shares transferred since that date or to changes as compared with that date in the number of shares held by a member. Explanation.- Any reference in this section or in section 160 or 161 or in any other section or in Schedule V to the day on which an annual general meeting is held or to the date of the annual general meeting shall, where the annual general meeting for any year has not been held, be construed as a reference to the latest day on or before which that meeting should have been held in accordance with the provisions of this Act.](2) The said return shall be in the Form set out in Part II of Schedule V or as near thereto as circumstances admit 2[ and where the return is filed even though the annual general meeting has not been held on or before the latest day by which it should have been held in with the return a statement specifying the reasons for not holding the annual general meeting]:(c) the conditions subject to which any manufacturing into stock and given notice of the conversion to the Registrar. the list referred to in paragraph 5 of Part I of Schedule V shall state the amount of stock held by each of the members concerned instead of the shares so converted previously held by him.207. Penalty for failure to distribute dividends within forty- two days. Where a dividend has been declared by a company but has not been paid, or the warrant in respect thereof has not been posted, within 1[ forty- two days] from the date of the declaration, to any shareholder entitled to the payment of the dividend, every director of the company; its managing agent or secretaries and treasurers; and where the managing agent is a firm or body corporate, every partner in the firm and every director of the body corporate; and where the secretaries and treasurers are a firm, every partner in the firm and where they are a body corporate, every director thereof; shall, if he is knowingly a party to the default, be punishable with simple imprisonment for a term which may extend to seven days and shall also be liable to fine: Provided that no offence shall be deemed to have been committed within the meaning of the foregoing provision in the following cases, namely:-(a) where the dividend could not be paid by reason of the operation of any law;1. Ins. by Act 31 of 1988, s. 28 (w. e. f. 15- 6- 1988 ).2. Subs. by Act 65 of 1960, s. 59, for" three months".(b) where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with;(c) where there is a dispute regarding the right to receive the dividend;(d) where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or(e) where, for any other reason, the failure to pay the dividend or to post the warrant within the period aforesaid was not due to any default on the part of the company. Payments of interest out of capital.211. Form and contents of balance sheet and profit and loss account. 1[(1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case; and in preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading" Notes" at the end of that Part: Provided that nothing contained in this subsection shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity or to any other class of company for which a form of balance sheet has been specified in or under the Act governing such class of company.](2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto: Provided that nothing contained in this sub- section shall apply to any insurance or banking company 2[ or any company engaged in the generation or supply of electricity], or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of company.(3) The Central Government may, by notification in the Official Gazette, exempt any class of companies from compliance with any of the requirements in Schedule VI if, in its opinion, it is necessary to grant the exemption in the I[ public interest]. Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification.(4) The Central Government may, on the application or with the consent of the Board of directors of the company, by order, modify in relation to that company any of the requirements of this Act as to the matters to be stated in the company' s balance sheet or profit and loss account for the purpose of adapting them to the circumstances of the company.(5) The balance sheet and the profit and loss account of a com- pany shall not be treated as not disclosing a true and fair view of the1. Subs. by Act 65 of 1960, s. 62, for sub- section (1).2. Ins. by s. 62, ibid.3. Subs. by s. 62 ibid. for" national interest"state of affairs of the company, merely by reason of the fact that they do not disclose-(i) in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938 ; (4 of 1838 .)(ii) in the case of a banking company, any matters which are not required to be disclosed by the Banking Companies Act, 1949 ; (10 of 1994 )(iii) in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by 1[ both the Indian Electricity Act, 1910 , (9 of 1910 ) and the Electricity (Supply) Act, 1948 ]; (54 of 1948 .)(iv) in the case of a company governed by any other special Act for the time being in force, any matters which are not required to be disclosed by that special Act; or(v) in the case of any company, any matters which are not required to be disclosed by virtue of the provisions con- tained in Schedule VI or by virtue of a notification issued under sub- section (3) or an order issued under, subsection (4).(6) For the purposes of this section, except where the context otherwise requires, any reference to a balance sheet or profit and loss account shall include any notes thereon or documents annexed thereto, giving information required by this Act, and allowed by this Act to be given in the form of such notes or documents.(7) If any such person as is referred to in sub- section (6) of section 209 fails to take all reasonable steps to secure compliance by the company, as respects any accounts laid before the company in general meeting, with the provisions of this section and with the other requirements of this Act as to the matters to be stated in the accounts, he shall, in respect of each offence, be punishable with imprisonment for a term which may I extend to six months, or with fine which may extend to one thousand rupees, or with both: Provided that in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove 2[ that a competent and reliable person was charged with the duty of seeing that the provisions of this section and the other requirements1. Subs. by Act 65 of 1960; s. 62, for" the Electricity (Supply) Act, 1948 (54 of 1948 )".2. The words" that he had reasonable ground to believe and did believe" omitted by S. 62, ibid.aforesaid were complied with and was in a position to discharge that duty: Provided further that no person shall be sentenced to imprison- ment for any such offence unless it was committed wilfully.(8) If any person, not being a person referred to in sub- section (6) of section 209, having been charged by the managing agent, secretaries and treasurers, 1[ managing director or manager,] or Board of directors, as the case may be, with the duty of seeing that the provisions of this section and the other requirements aforesaid are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months or with fine which may extend to one thousand rupees, or with both: Provided that no person shall be sentenced to imprisonment for any such offence un
- BuybackOf SharesChapter 13Recommendations & FindingsWhat should you look at before participating in buybacks?Ever since the buyback of shares was allowed in India, there has beena lot of confusion among shareholders; as whether to sell-off theirstake in the company or to retain it. To opt for a particular option is notas easy as it appears. The perception of the shareholders about thefuture of the company is the most important factor that influencestheir decision.However, that decision may not be accurate since they might not havecomplete access to the internal and external strategies of thecompany. A lot of careful thought has to be given before a finaldecision is taken. Here’s a way on how to go about it.Debt-equity ratio is an important criterion. The companieshaving high debt burden are unlikely to have free cash. They shouldprefer redeeming their debt first, to buying back equity. MNCshaving subsidiaries in India are unlikely to have any motive ofrigging up the share price and their buyback offer is likely to begenuine.Track record of raising capital in the past. Companies thathave frequented the capital markets to raise money are unlikely tobe good candidates for buyback.BuybackOf SharesLook at ROCE/RONW-The companies with consistently highROCE/RONW are more likely to have free cash than others.Checkout the previous price pattern of the shareCompanies generally tend to buyback shares at a higher premiumover the market price if they feel that their shares are under-priced.This decision to buyback often leads to an increase in share price.At this stage, you have to analyse the fluctuation in the price of thescrip for a specific time period (say one year) and if you find thatthe scrip moved a band lower than the offer price, selling of thescrip would be a better option.Take note of Irrationality A buyback offer with a hugepremium may appear very attractive. Investigate and ensure thatany temporary negatives do not affect the share price. If you feelthat the share prices of the company are presently undervalued,refrain from selling, since a company buying back its shares isindirectly conveying that its shares are undervalued.Take a long-term perspective It would be difficult toenvisage whether a company would issue bonus or split shares ormake an acquisition. But these factors can be sidelined if thefundamentals of the company are strong and you expect thecompany to perform well in the future. Therefore, in the long-termperspective, the scripts of such companies should not be sold.Dispose off volatile shares Despite strong fundamentals,the shares of a few companies are highly volatile and exhibit wildoscillation in prices. If you want to play it safe and avoid volatility,selling out would be a better option.BuybackOf SharesSelling off for profit The first question that comes to mindonce you decide to sell your scrip is whether to opt for a buyback orto sell it in the market. Even after buyback is announced, thepurchase price need not necessarily be the highest if a price band isgiven. Further, there is no guarantee that all the shares offered forbuyback would be bought. Companies mostly buy about 10% of theequity in buybacks. In such cases it would be wiser to sell yourstake in the market at a time when prices of your scrip are trading at a price equivalent to the highest in the offer band.Finally, one should keep one thing in mind, that buyback has no impacton the fundamentals of the company or on the economy. The onlything is that one should be cautious of unscrupulous promoters' trapsand do not fall prey to them.The provision to allow buyback can be a booty for long-term investorswho want to stick on in good companies, but it can be a terrible bait inmany others